Stimulus or Stymied? The Macroeconomics of Recessions

The transcript of the AEA session that Brad Delong moderated is worth reading.

When asked how his thinking about macroeconomics had changed, Harald Uhlig mentioned this paper by Johannes Wieland, who is a friend of mine and one of the top job market candidates this year:

Let me mention something on which I have shifted my views. Johannes Wieland is from Berkeley. In his job market paper he says that in new Keynesian models at the zero lower bound there is, theoretically, a perverse reaction to supply shocks. An adverse supply shock which reduces potential output rises expected inflation and so reduces real interest rates and boosts output. this topsy-turvy effect enables an adverse supply shock to actually increase output at the zero lower bound. He goes out and tries to see if this is actually true. He finds the opposite is true: if you raise oil prices it is actually bad for Japanese output and not good at the zero lower bound. The world seems to have a more conventional reaction. He comes to the conclusion that this tells us something about the model—if you have a model in which everything is determined by sticky prices, in crisis times you can see that a better fit is attained by models that say that you really ought to look at balance sheets. Other research has recently emphasized balance sheets as very important in what has been happening in the past several years. There are lots and lots of open questions out there that I wish we just understood more.


About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar.
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